Massachusetts Noncompete Bill Advances, but Passage Remains Uncertain

In March, we reported that Massachusetts House Speaker Robert A. DeLeo had announced his support for legislative restrictions on employee noncompetition agreements, signaling a potential turning point in the long-running debate in Massachusetts over whether noncompetes should be banned or restricted through legislation.

Speaker DeLeo proposed legislation that would include (1) a duration limit of one year after the end of employment; (2) a requirement that employers provide advance notice to job applicants and employees who will be asked to sign noncompetition agreements with a stated right to advice of counsel; and (3) an exemption for low-income workers. In our March article, we noted that such a proposal could seem reasonable to many Massachusetts employers but cautioned that “the devil is in the details,” and the actual bill could contain provisions that are highly problematic to employers.

On May 16, 2016, the Massachusetts legislature’s Joint Committee on Labor and Workforce Development released draft legislation containing (in some form) the three components proposed by Speaker DeLeo but also containing a number of significant “details” that many employers will view as problematic.

The anticipated—and less objectionable—provisions of the draft legislation include the following:

• Noncompete agreements may not restrict employees for more than one year from the date of the termination of their employment.
• The one-year duration limit on noncompetes may  be extended for up to two years if an employee has unlawfully stolen property belonging to the employer or breached fiduciary duties that he or she owes the employer.
• If parties enter into a noncompete agreement at the start of employment, the employer must provide the agreement at either the time of the formal offer of employment or 10 days prior to the start of employment, whichever is earlier.
• The proposed law defines noncompete agreements to exclude nonsolicitation agreements (regarding other employees, customers, and vendors of the employer); noncompete agreements made in connection with the sale of a business when the restricted person is an owner, partner,  or member in the business; forfeiture agreements; confidentiality agreements; intellectual property assignment agreements; nonrehire agreements; and noncompete agreements made in connection with a separation agreement if the employee is provided seven days to rescind acceptance of the agreement.

The additional provisions that may be disadvantageous to employers include the following:

• With respect to the proposed exemption for low-income workers, the draft legislation excludes anyone classified as nonexempt under the federal Fair Labor Standards Act.  Given the recent changes to the federal overtime regulations (which are expected to impact more than 4 million employees, causing many to be reclassified as nonexempt) this exclusion could further limit the use of noncompetes and invite disputes over whether certain employees should be classified as nonexempt and not be subject to noncompete restrictions.
• Noncompetes would not apply to interns or other individuals with short-term employment relationships while enrolled in undergraduate or graduate schools, or to employees under the age of 19.
• Noncompetes will become invalid for any employee who is laid off or discharged without cause. If enacted, this provision would significantly limit employers’ use of noncompetes. For example, employers that are forced to lay off or discharge employees for financial reasons would lose the protections they had negotiated earlier in the employment relationship.
• Noncompetes will be required to include “garden leave” clauses providing for payment to former employees throughout the entire restricted period equal to at least 50 percent of their salaries and prohibiting employers from discontinuing or refusing those payments. This garden leave provision—the payment of half-salary for the restricted term—would apply regardless of whether the employee left voluntarily or was discharged for cause (as noted above, if the employee was discharged without cause, the noncompete would be unenforceable.) 
• If the parties enter into a noncompete agreement during employment, the noncompete must be supported by fair and reasonable consideration that is separate and apart from the continuation of employment. The amount of this consideration is left undefined in the draft legislation, but it could be significant. Additionally, the employer would need to provide the employee at least 10 days to review the agreement before its effective date and would need to inform the employee that he or she has the right to consult with an attorney prior to signing the agreement.
• The bill would prohibit courts from reforming noncompetes in order to make them valid and enforceable to protect legitimate business interests. In other words, a noncompete agreement that does not comply with the new law in any way would be void and unenforceable in its entirety. The law would prohibit courts from using reformation to apply some of the agreement’s terms in a lawful manner, as courts currently do.
• The legislation would permit any litigation concerning noncompete agreements to be brought only in certain courts: the Massachusetts superior court where the employee resides or the business litigation session of Suffolk Superior Court. Those courts would have exclusive jurisdiction to hear all civil actions related to the law. This provision would limit employers’ ability to bring suit in their preferred court or the court where they are based.
• Noncompetes could not include a choice-of-law provision to avoid this new Massachusetts law if the employee is either a resident of or employed in Massachusetts.

Finally, the draft legislation includes a proposed effective date of July 1, 2016, for agreements entered into on or after that date. This would leave employers with very little time to ensure that all of their new agreements comply with the numerous requirements of the new law. Under the current terms of the legislation, a court will be unable to enforce a noncompete agreement that does not comply with all provisions of the new law. 

The fate of this draft legislation is quite uncertain. With many provisions that go beyond what Speaker DeLeo proposed in March, employer opposition to the legislation would appear to be more likely. The Massachusetts legislative session ends in July, so the refinement of the draft legislation and its passage would need to be completed within the next 10 weeks. Even then, it could face a potential veto by Governor Charlie Baker. We will continue to monitor the progress of this proposed legislation because if some version of it becomes law, it will significantly impact employers’ use of noncompete agreements in the Commonwealth.